If there is a quantitative measure for Edge, what is it?
- Thread starter OddTrader
- Start date
IMO, edge is not a measurement of the performance of your system/trading result or expectancy (win/loss ratio, etc).
I'd rather think it is just an advantage and it is all relative.
Some have fast internet connection as an edge for scalping over those who don't;
Some have a bigger account;
Some have a bigger size and louder voice for trading in the pit;
Someare privy to information or get information sooner;
Some have better trading software;
Some have better discipline;
Some have better insight into market direction;
Some know his greeks better for options;
Some have better MM skills;
etc, etc,
You will not have all of these advantages (slight or huge), but it is how well a trader knows himself and his trading environment and how he makes use of these to develop his game plan and strategy that leads to his success. So as such, edge is not quantifiable.
Just my 2c.
I'd rather think it is just an advantage and it is all relative.
Some have fast internet connection as an edge for scalping over those who don't;
Some have a bigger account;
Some have a bigger size and louder voice for trading in the pit;
Someare privy to information or get information sooner;
Some have better trading software;
Some have better discipline;
Some have better insight into market direction;
Some know his greeks better for options;
Some have better MM skills;
etc, etc,
You will not have all of these advantages (slight or huge), but it is how well a trader knows himself and his trading environment and how he makes use of these to develop his game plan and strategy that leads to his success. So as such, edge is not quantifiable.
Just my 2c.
This is the Acrary I have read...yes.....What an opportunity to be able to study his work in his trading room...but I guess that will never happen...
Q
From an older thread - To determine if an "Edge" is real:
Quote from acrary:
I measure my edge by taking the trades and checking them versus random other possible entry periods given the same holding period. For example, if I have 50 long trades in a year with a one day holding period. I test 5000 random combinations of 50 one day buys with a one period hold and rank the random results. If my total profit from the 50 one day longs beats at least 70% of the random entries, I'm encouraged. Same test is applied to the short side trades. I do this for several years backtesting to make sure the edge is stable. If it is, then I trade it. When it starts to drop below 60%, I stop trading it and move on to another edge.
Jack
UQ
Thanks Jack for quoting the above ranking method which provides some good insights .
A potential problem would be that even my personal best system can be a reasonably profitable one in real trading, as I could never be able to develop a further better one in my life, however my this system may be only ranking around 50% among all random-based systems.
From an older thread - To determine if an "Edge" is real:
Quote from acrary:
I measure my edge by taking the trades and checking them versus random other possible entry periods given the same holding period. For example, if I have 50 long trades in a year with a one day holding period. I test 5000 random combinations of 50 one day buys with a one period hold and rank the random results. If my total profit from the 50 one day longs beats at least 70% of the random entries, I'm encouraged. Same test is applied to the short side trades. I do this for several years backtesting to make sure the edge is stable. If it is, then I trade it. When it starts to drop below 60%, I stop trading it and move on to another edge.
Jack
UQ
Thanks Jack for quoting the above ranking method which provides some good insights .
A potential problem would be that even my personal best system can be a reasonably profitable one in real trading, as I could never be able to develop a further better one in my life, however my this system may be only ranking around 50% among all random-based systems.
Jack,
Unfortunately even that is not enough.
It's a good starting point indeed, but the market may change the moment you go live with your brand new system. You test, test, test, then go live and the things are almost never as bright as your tests told you.
Everyone loves certainty but we choose for ourselves an activity (trading) that couldn't be further from it.
All you can do is do your homework of course but then you have to give your system a try with real money. ONLY then you'll know if it has a chance to survive. How long? You cannot know in advance.
If you think any backtest alone may safely state that your edge is real upfront, you're just tricking yourself.
GS